The rules governing Withholding Tax (WHT) on Danish equities are changing. 

Danish investors in Danish Investment Associations (in Denmark the most common form of UCITS) have traditionally enjoyed 0% WHT on dividends from domestic equities. However, following a court ruling on the equal treatment of investors (see PwC’s report on the case), the Danish Government decided that Danish Investment Associations will have to pay effectively the same 15% WHT.

This corresponds to the effective rate that non-resident investment funds pay (where the WHT is 27% but they can claim a refund of 12%). The new 15% WHT will apply to Danish Investment Associations from 1 January 2022. Considering that such portfolios are likely to have a higher weighting in Danish equities than many overseas investors, we think this will impose a significant fiscal drag on local fund performance. 

Calculations indicate that with the current 1.2% yield on Danish equities, the new WHT could impose a tax drag of 18bps on these domestic pooled funds.* That means Danish Pension Funds holding some $7bn of Danish equities** through Investment Associations could pay an additional $12mn of tax each year.

Some Danes could benefit from a move to Dublin

There is an answer to these taxation changes. It comes in the form of an Irish domiciled Common Contractual Fund (CCF). Unlike an Investment Association, this provides a level of tax transparency that enables fund administrators, such as AMX, to ‘see through’ the fund to the beneficial investors and apply the correct WHT relief to every holding. 

For tax exempt investors, such as pension funds, this means we can apply the applicable treaty rate of 0% WHT, or applicable domestic exemptions available. In fact, we can apply this 0% WHT not only to Danish equities but also to US equities under the US-Denmark tax convention. This represents a significant reduction in the tax drag that not only helps institutional investors reduce costs but also enhances investment performance.

For more information on this topic, please read our recent blog post on how we can use the tax transparency of CCFs to apply different reliefs to different investors. 

To find out how you can achieve the correct WHT rate for your Danish investors on their Danish and US equities, please get in touch. 

*msci.com (figures taken at January 2021)

**Skatteministertiet – Danish Ministry of Taxation: Tax Committee Response, May 25, 2021

Photo by Julius Yls on Unsplash